U.S. warns China, says no forex violation

05/17/2005

Tuesday May 17, 4:41 PM EDT
By Glenn Somerville

WASHINGTON (Reuters) - The United States, in its harshest warning yet on China’s rigid foreign exchange policy, said on Tuesday it risked being named a manipulative trading partner unless it took significant steps toward flexibility.

While the U.S. Treasury said in its semiannual report on currency practices of trading partners that no country used foreign exchange to gain an unjust edge in the latter half of 2004, China faced pointed criticism.

“If current trends continue without substantial alteration, China’s policies will likely meet the statute’s technical requirements for designation,” the Treasury report said.

“Current Chinese policies are highly distortionary and pose a risk to China’s economy, its trading partners and global economic growth,” it said.

President Bush had some tough words for China on a different subject, saying Beijing should abide by global trade rules and his new top trade official would work to stop China’s piracy of U.S. intellectual property.

U.S. Treasury Secretary John Snow made clear Washington was not calling for a full float of China’s yuan currency now, but did want a swift and significant step toward that goal.

STEP BY STEP

“What we are calling for is an intermediate step that reflects underlying market conditions and allows for a smooth transition—when appropriate—to a full float,” Snow said.

“But the message is it should be significant. It should be a real step. It should be something the world could see and know that China means business in getting its currency into alignment with underlying demand and supply,” he added.

The report to Congress—hotly awaited in financial markets—comes as anger mounts on Capitol Hill over China’s practice of pegging its currency at about 8.28 to the dollar.

Sen. Charles Schumer, a New York Democrat, said a new Treasury Department report criticizing China’s currency practices was the toughest yet from the Bush administration, “but not quite tough enough.”

Schumer and Sen. Lindsey Graham, a South Carolina Republican, said they would reintroduce a bill to tighten the definition of currency manipulation.

U.S. exporters claim the yuan is as much as 40 percent undervalued, making Chinese goods unfairly cheap. U.S. stock prices, in negative territory ahead of the report, quickly shot into the plus column on investor relief the U.S. and China were not about to engage in an escalating trade tiff.

The currency market showed little reaction.

Top U.S. Treasury officials have pressed Chinese officials to ease a currency peg they say the country has outgrown.

TOUGHER TALK

The Bush administration has stepped up the rhetoric lately as Congress goes more restive about cheap Chinese imports, which U.S. producers claim have cost tens of thousands of jobs and shuttered plants in industries from textiles to toymaking.

“While the benefits of China’s ten-year-long pegged currency regime may have at times served well the Chinese economy, this is no longer the case for the large, increasingly market-based economy that China has become,” the report said.

Treasury praised China for steps to prepare its financial system for more flexibility in the yuan, or renminbi, but said the time has come for action.

“It is now widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions,” the Treasury said.

Treasury said it will monitor China’s currency practices closely over the next six months—an indication that unless Beijing introduces flexibility by then it will be named a manipulator in the next semiannual report to Congress.

Snow said China’s banking system was not yet ready for a full float of the yuan and Beijing would need to determine how far it could go to meet the U.S. call for aligning its currency “with underlying market conditions.”

If China was deemed a manipulator, the United States could launch intense talks with Beijing, either through the Treasury or under the auspices of the International Monetary Fund, which Treasury consults in preparing the currency report.

A designation could also could open the door to retaliatory action, within the bounds of international trade law. Last week, the Bush administration announced plans to reimpose curbs on imports of Chinese trousers, shirts and underwear, a move denounced by Beijing as flouting world trade rules.

China has vowed it won’t be pushed on currency reform.

“We will steadily push forward reform of the renminbi exchange rate formation mechanism,” Vice Premier Zeng Peiyan said on Tuesday.

But China’s big trade surplus with the industrial world is increasing the pressure from both Europe and the United States to loosen the peg and let the yuan rise. The U.S. trade gap with China widened to a record $162 billion dollars last year.

The Treasury said normal trade-balancing mechanisms are thwarted when currencies cannot adjust in value.

“The adjustment of global imbalances is a shared responsibility,” the report said.